First Industrial Realty Trust Inc Q3 FY2024 Earnings Call

Good day, and welcome to the First Industrial Realty Trust, Inc. Third Quarter Results Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President of Investor Relations and Marketing. Please go ahead, sir.

All right. Thank you, Dave. Hello, everybody, and welcome to our call. Before we discuss our third quarter results and our updated guidance for the year, let me remind everyone that our call may include forward-looking statements as defined by Federal Securities Laws. These statements are based on management's expectations, plans, and estimates of our prospects. Today's statements may be time sensitive and accurate only as of today's date, October 17, 2024. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report earnings release and our SEC filings are available at firstindustrial.com under the Investors tab. Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, Chief Financial Officer, after which we'll open it up for your questions. Also with us today are Jojo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Executive Vice President of Operations; and Bob Walter, Executive Vice President of Capital Markets and Asset Management. Now let me turn the call over to Peter.

Thank you, Art, and thank you all for joining us today. The First Industrial team delivered another great quarter with solid operating metrics, along with some important new leases and capital deployment activity. We continue to drive cash flow growth from our portfolio via contractual escalations in our leases, capturing embedded rent growth on rollovers and continued development leasing, all of which position us to deliver strong growth in funds from operations. Before getting into specifics, let me update you on the industrial market broadly. According to CBRE EA, U.S. industrial market vacancy increased a modest 10 basis points to 5.8%, reflecting that most of last year's development starts have now come online. Completions for the third quarter totaled 87 million square feet. This is down approximately 30% compared to last quarter and the lowest quarterly completion number since the third quarter of 2021. For our target markets, completions were 45 million square feet, down 40% from the prior quarter. New starts remain disciplined, totaling 36 million square feet in the third quarter, down 68% from the peak in the third quarter of 2022. On the demand side, the third quarter was active with net absorption nationally of 54 million square feet. This brought the year-to-date total to approximately 125 million square feet, of which 75 million were in our target markets. Renewal leasing, in particular, remained strong. Since our last call, we successfully renewed the last of the three large 2024 Southern California expirations with a cash rental rate change of more than 150%. As of the date of this call, we are now through 97% of our 2024 lease expirations by square feet. Our cash rental rate increase is 51% which is a strong follow-up to the 58% cash rental rate growth we delivered on our 2023 commencements. Congratulations to our leasing teams for back-to-back years of outstanding performance on this metric. Looking at our 2025 lease expirations, we are making good progress and are now through 37% by square footage, which is similar to our pace of progress last year. Together with new leasing, our cash rental rate increase for leases signed with 2025 commencement date is 33%, more than half of this population is comprised of the 1.3 million square foot fixed rate renewal in Central PA, we discussed on our last call. We will give you a refined view of our thoughts on our estimated 2025 cash rental rate increase on our fourth quarter call with the benefit of budget reviews and incremental signings. Regarding development leasing, as we highlighted on our last call, in the third quarter, we inked a full building lease for our 461,000 square foot First Pioneer project in the Inland Empire East, to a logistics company plus a 61,000 square foot lease at our first 76 project in Denver. Turning now to capital deployment, we continue to closely monitor demand and competing supply in our target investment markets, determining potential incremental starts as we wrap up 2024. Since our last call, we launched a 542,000 square foot development at our first Rockdale Park in Nashville. Our total projected investment is $54 million with an expected cash yield of approximately 7%. The current supply/demand dynamic in Nashville is attractive, and we like the long-term drivers of this market. Current vacancy stands at just 2.7%, and unleased new supply represents about 2% of the total stock. We also acquired a four-building 211,000 square foot park in Houston Southeast submarket with close proximity to the port. The buildings are 100% leased on a long-term basis. Our total investment is $29 million, and the in-place cash yield is approximately 6%. Moving now to dispositions. As discussed on our last call, we sold a portfolio in New Jersey for $82 million. In the fourth quarter to date, we sold three buildings in Pennsylvania, totaling 163,000 square feet for a total of $19 million. This brings our year-to-date total to $157 million. With that, let me turn it over to Scott to walk you through further details on our results and guidance.

Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.68 per fully diluted share compared to $0.62 per share in 3Q 2023. Our cash same-store NOI growth for the quarter, excluding termination fees was 7.6%. The results in the quarter were primarily driven by increases in rental rates on new and renewal leasing, and rental rate bumps embedded in our leases, partially offset by higher free rent and lower average occupancy. Excluded from the same-store calculation is the accelerated recognition of a tenant improvement reimbursement related to our tenant who leases 1.1 million square feet in Central Pennsylvania. Including this amount, our third quarter cash same-store NOI growth was 11.9%. I will have some additional comments on this tenant shortly. We finished the quarter with in-service occupancy of 95%. Within the in-service portfolio, we have approximately 200 basis points of lease-up opportunity from developments placed in service in 2023 and 2024. Summarizing our leasing activity during the quarter, approximately 3.5 million square feet of leases commenced. Of these, 500,000 were new, 2.2 million were renewals and 900,000 were for developments and acquisitions with lease-up. Turning back to our lease with the tenant, as reported in the press, they are ceasing operations at our building for which they have 10 years remaining on their lease. Due to the cessation of their operations, we've written off their straight-line rent asset and tenant improvement reimbursement liabilities, the net result of which is a $0.01 per share reduction in our 2024 NAREIT FFO. They are current on the rent and have a shorter-term sublease to a third-party logistics provider for about 40% of the building. Also keep in mind that we have a security deposit in the form of a letter of credit, which covers about a year's worth of rent. Let me quickly review our updated guidance for 2024. Our guidance range for NAREIT FFO is now $2.61 to $2.65 per share, which is a tightening of the range and an increase at the mid-point of $0.02 per share since our last earnings call. Key assumptions have been tightened as we only have one quarter remaining in 2024. End of fourth quarter occupancy range of 95% to 97% implies a quarter-end average for the year of 95.2% to 95.7%. Our occupancy guidance now assumes about 800,000 square feet of development leasing we had previously slated for the fourth quarter will now take place in 2025. Fourth quarter cash same-store NOI growth before termination fees of 8% to 10%. This implies a 7.75% to 8.25% range for the year, which is a 25 basis point increase at the midpoint since our last earnings call. Note that the same-store guidance excludes the impact of the accelerated recognition tenant improvements related to the Central Pennsylvania lease in 2024 and the one-time tenant reimbursement in 2023 that we previously disclosed. Guidance includes the anticipated 2024 costs related to our completed and under-construction developments at September 30. For the full year 2024, we expect to capitalize about $0.06 per share of interest, and our G&A expense guidance range is $39.5 million to $40.5 million. Let me turn it back over to Peter.

Thanks again to the First Industrial team for another solid quarterly performance through our focused strategy and capital allocation actions, we've created a high-quality portfolio that is well positioned to outperform through the business cycle. We have embedded growth opportunities within our portfolio, and we have future growth opportunities from our current landholdings on which we can build over 14 million square feet of highly functional and well-located logistics facilities. Our balance sheet is strong, and we have flexibility with no maturities until 2026, assuming the exercise of extension options and our bank loans. Operator, with that, we're ready to open it up for questions.

We will now begin the question-and-answer session. Our first question comes from Blaine Heck with Wells Fargo. Please go ahead.

Great. Thanks. Good morning. So occupancy guidance implies upside from the third quarter, but has a relatively wide range of outcomes between 95% and 97% at year end. I guess, can you just talk about some of the biggest drivers in the lease-up portfolio that could kind of push you towards the upper end of that guidance? Are there any specific large leases you're working on that you can maybe give us some color on?

Yeah. This is Chris. If you look at the occupancy drop about half of it was from the development portfolio that we talked about, the other half was from the core portfolio. As we stand here today, we certainly do have some activity or we're talking to some tenants, but we thought it was prudent to push back on lease-up with only two months left in the quarter.

Hey, Blaine. It's Scott. I think development leasing is the key to hit the high. And frankly, it could be going below the midpoint. We've got 400,000 square feet of development leasing built into our guidance in the fourth quarter, that's about 60 basis points. If we get more than that, we'll be above our mid-point occupancy guidance.

Great. That's very helpful. And then maybe just a little bit more of a high-level question. I guess, given that you all have a relatively diverse portfolio geographically. It seems as though you're in a good position to talk about which markets you think are poised to inflect sooner than others. I guess, can you just talk about which markets you're feeling best about from a supply and demand standpoint, and which you think might take longer to come back to seeing rental rate growth?

Sure. Let's look at it from East to West. As you've noticed, rent growth has been particularly strong in Southern California, other West Coast markets, New Jersey, and South Florida. These are the areas where the change in dynamics has occurred first. The leasing progress in our portfolio has also been stronger in the East. This whole situation will change over time as the available alternatives in the marketplace for potential tenants get absorbed, and we are currently observing that happening, which is translating into more leasing activities. Peter, do you want to add to that?

The only other thing I'd say is, as we think about rental rate growth. We continue to see traction in Pennsylvania, Nashville and Houston today, generally speaking.

Jojo, do you want to comment on the West?

Yes. In terms of the cycle, it takes time for us to process and absorb the supply we have. However, we are experiencing an increase in offers and proposals.

Very helpful. Thank you.

Our next question comes from Craig Mailman with Citi. Please go ahead.

Good morning. Just Scott, on the tenant lease. So you guys, I guess, they're on a cash basis accounting now. Is that correct? And kind of how should we think about the impact of that if they continue to pay rents over the next couple of quarters or are you guys planning on taking back the security deposit and trying to go direct with the subtenant kind of what's the game plan here to attack this to either get it released or continue the cash flow on the asset?

Right. I'll take care of the accounting piece of it, and I'll let Peter Schultz take care of the question about the tenant more in detail. So Craig, you're right, we're on a cash basis. And again, as we mentioned in the script, they're current on their rent right now, and if they continue to be current, obviously, we'll reflect that NOI in our FFO. If they stop paying rent, we do have the security deposit in the form of a letter of credit. So we can use that for about up to a year that covers about a year's worth rent. So that's something that would help us out in the case that they stop paying rent. And I'll turn it over to Peter to talk about the tenant more in detail.

Thanks, Scott. Good morning, Craig. So the tenant is in the process of winding down their operations at the building, which should be completed by the end of the year. They then plan to put the entire building on the market for sublet. They will be retrenching back to the U.K. to fulfill their orders. Today, there are very few options for this quality of a building in Central Pennsylvania. So they feel pretty good about their prospects for subletting. They also have a current subtenant in a portion of the building, about 400,000 square feet or so through their 3PL, DHL, who is managing that. So that's subsidizing, if you will, some of their rental payments, but they fully intend to honor their lease obligation and have some success with subletting the building. We'll keep you posted on that.

Okay. And so, if they do pay rent in the fourth quarter, kind of, what could that be upside to the guidance, Scott?

We have them paying rent, Craig.

You have them paying rent in the guidance? Okay.

Yes, definitely, as they are making payments. Additionally, we have the letter of credit serving as their security deposit. This means that even if they cease rent payments, I can still record the rental income because of the letter of credit, which is secured by a bank rather than directly from the tenant. Consequently, accounting regulations will allow me to recognize that security deposit moving forward if they stop paying. So, if they do stop paying now, I'd expect to be able to reflect that through probably the end of next year's third quarter or early fourth quarter.

Perfect. And then, just going back to Blaine's question on the occupancy side. So we're halfway through October here, and you have 400,000 square feet of development leasing in the number. How does the activity of that 400,000 square feet look and from a kind of average occupancy in the fourth quarter versus ending occupancy? Where should we be thinking about that depending on when some of the stuff could hit? Is this just going to be more kind of first quarter 2025 impact from an earnings perspective?

Well, I would say, the development leasing, we have it baked into our guidance at the end of the fourth quarter, so that's how we have it factored in. As far as what is included in that 400,000, correct, that's a macro assumption. There could be many different combinations of development leases with the properties that we have available. I would say, the prospects we have for it is pretty decent at this point in time, but we have work to be done. There's only about two months left in the year.

Great. Thank you.

And the next question comes from Vikram Malhotra with Mizuho. Please go ahead.

Thank you for the questions. Could you provide an update on how the watch list has changed? Specifically, there's a known move-out scheduled for the first quarter of next year from Federal-Mogul. Can you discuss the prospects for re-leasing that space? Thank you.

Peter?

Sure. Vikram, good morning. It's Peter Schultz. Right. That's the 780,000 square foot building, that lease expires at the end of March. The tenant's already out of the building. So we've done our make-ready work to position the building for marketing. We have seen some interest in it already, and we're encouraged by the limited number of options for that size space in Central Pennsylvania today.

And Vikram, what was your question again on Mogul…

Just the watch list, like, the tenant watch list just given the kind of sublet volumes and bankruptcies in certain segments, just in the economy softening, just mind giving some color on the watch list?

Sure. Other than Boohoo, nothing material on the watch list at this point in time.

Okay, great. Lastly, you've made a few acquisitions. I'm curious about your capital deployment approach. You mentioned that project starts have decreased, but you initiated a new development. Some of your competitors with substantial development pipelines have scaled back. What are your thoughts on development and acquisitions as we approach 2025?

So with respect to development, we continue to keep a close eye on the submarkets where we have development opportunities. Obviously, there are a lot of factors involved that impact the fundamentals of those submarkets, whether it's the wars around the world, what's happening in the economy, the election. We have been hearing from some big tenants that, that's causing them to put their decision-making off to the end of the year. When we look at the fundamentals around the country, the markets that we think are going to be most encouraging for new starts next year will be in Pennsylvania, Texas, South Florida, again, and of course, Nashville, which again is one of the stronger markets in the country.

Thank you.

And the next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Hi. Good morning, everyone. I was wondering if you could talk a little bit more about new leasing, whether development or other vacancy. I guess, what do you think it will take for new leasing to pick up and what's your take on utilization, and how that's impacting kind of the market today?

Peter, do you want to take that?

Sure, Caitlin. Good morning. It's Peter Schultz. A couple of comments, in terms of space utilization in our discussions and inspections with our tenants, generally, pretty high, sublet space other than the one we just talked about with Boohoo not that material. In terms of the cadence and pace of decisions and discussions, some tenants are operating with more urgency. But most, as Peter just commented on or not for a variety of reasons. So there is demand and there's activity. And I would say that the level of prospects in the market today are probably better than it has been for most of the year, but the pace of that decision-making continues to be lumpy and somewhat deliberate.

There's a lot of uncertainty out there with respect to the macro economy, geopolitical issues. The weather is now on people's mind. So we need to work through these things. But we believe we see there's pent-up demand. There are definitely larger tenants who have investment dollars for growth that they want to get going on, and they're just waiting for the fog to clear a little bit on some of this uncertainty.

Got it. Okay. And then just maybe on the acquisitions versus disposition strategy at this point, I could maybe imagine that you're looking to sell lower growth properties and buy higher growth ones. But I guess, like how possible is that? And you mentioned the 100% lease rate for the Houston acquisition. So just wondering kind of what's the opportunity there?

Yeah. So for us, we're kind of choosy about what we're going to buy. It has to be in the right place and have the right functionality and a lot of other factors. And so typically, we do best when there are complications around deals, let's call them challenges. And so, we don't participate in the broadly attended options, by and large, and we're much better at acquiring assets, as I said, where there's work to be done. So that's the strategy there. And again, we're focusing on the submarkets that we think are going to show the most growth over the coming near to medium term.

And if I could, just on the Houston one, it doesn't sound very challenging given it's well leased. Was that one maybe it was just off market and it worked out? Are there some other complications that are not so obvious?

You accurately pointed this out, Caitlin; it was essentially an off-market deal. The seller was looking for certainty. We have a strong portfolio in the southeast submarket, and they preferred to partner with a buyer familiar with the area who could close quickly, which is why we succeeded in a limited marketing situation. There were very few competitors, and we are very satisfied with that acquisition, as it is a great new product with a 5.9% cash yield at the outset.

So Caitlin, I think you also asked about dispositions. You're right, as we have done for now quite some time. We're focusing on those assets that have a lower growth trajectory going forward so that we can redeploy that capital into higher growth opportunities. We'll keep doing that. But I think at a macro level, you will see the volume of those sales going forward be much lower than it's been in the past.

Thank you.

And the next question comes from Rich Anderson with Wedbush. Please go ahead.

Hey, thanks and good morning. First question is on the election, and you mentioned some tenants are holding off until they see what the outcome. What's the swing factor there? Like, is there like I'm not doing anything if Harris wins, but I'm all if Trump – like, I don't understand beyond tariff risk, what it is that will change on November 6, with the election in the minds of your tenants?

Yeah. So we don't get into the micro on nitty-gritty details. I think, generally speaking, it's about growth and the stability in the economy. And I can't attribute that to either candidate in terms of how that's going to come out. But it's the new growth investment, not the renewals. The renewal activity is extremely strong. As you've seen in our cash rent increases have been very, very strong. So it's really the new growth investment. People want to see what the landscape is going to look like either way, regardless of who wins and what that's going to mean for anything from economic activity and social unrest to increased regulation or decreased regulation. So there are some pretty big factors involved in the outcomes, and that's kind of it at a macro level.

Is there any like Red state, Blue state, Trump wins, Red states are going to do better or is that too oversimplifying it in your mind?

I don't have a view on that.

Not to get political on you guys, sorry. The next question is 8% same-store NOI growth for 2024 is your guidance. Do you have a read on what your earn-in is for 2025 based on particularly what you've done in the second half of 2024?

Are you asking for what we think an estimate of what it's going to be in 2025?

Yes, I want guidance for 2025.

Okay. Well, we're going to give it to you…

I'm talking about what is baked in? So if maybe there's 3% or 4% same-store already baked into next year because of what you did in 2024?

Well, I think the key drivers of same-store, a couple of different items. Occupancy is one on the core. I'm not going to get into that. But others are rental rate bumps that's been pretty stable. And then, it's the cash run rate increase on new and renewal leasing, what we're able to achieve next year because that's been a real driver of cash same-store growth for the industrial peers. We gave you a look into what we think early what 2025 is we signed 37% of the expirations in '25 at a 33% increase in cash rental rates, and that includes that fixed rate renewal option for the 1.3 million square footer in Central Pennsylvania. So I think the number is going to be a pretty good number. We've got to see how rental rates flesh out when we do our final guidance, what we think it's going to be a good year.

Could you share where you're observing market rent growth across the country and how it's currently trending? Additionally, how rapidly can these figures change? If there happens to be a recovery in the geopolitical situation and the political climate stabilizes, how quickly could you see a shift from 0% to 5% market rent growth in your business based on historical trends? I'm interested in understanding how fast we might witness a return to health in the marketplace.

Look, I mean, we can't put a time frame on that, but some math helps frame it. Net absorption is not bad. It needs to improve some. Completions, so the existing pipeline is way down, completions last quarter went from 72 million in the second quarter to 45 million this year, and this is in our markets. The construction pipe went from 170 million to 135 million feet and 28% of that 135 million is pre-leased. So when you look at the falloff in what we'll call new alternatives for prospective tenants, if we get some wind at our back on the net absorption front, at least the demand side, things can change. We don't think it's going to happen with any great speed. You're probably looking at the second half of next year. But aside from that, it's difficult to handicap.

And did you have a number for market rent growth that you're seeing today?

Yeah. So overall, rents are flattish to up a little bit. If you take Southern California out of that number, they're probably up 2% or 3%.

Okay. Great. Thanks, everyone.

And the next question comes from Rob Stevenson with Janney. Please go ahead.

Good morning, guys. Can you talk about the transaction market given that you've been both buyers and sellers recently given the first rate cut and the speculation leading up to that and sort of, where cap rates are today versus six months or 12 months ago, and how strong demand is and transaction volumes are that you're seeing out there ahead of the fourth quarter?

At a high level, there's definitely significant capital chasing opportunities in the space. We're seeing some pretty significant prices paid. We would say some people are making some pretty big bets on the prior question about speed of recovery. We see a lot of bets on that being quicker rather than longer. Peter and Jojo, do you want to comment on any specifics in your markets?

Rob, I would just say, as we monitor some of the widely marketed transactions earlier in the year, there were maybe six to eight bidders, and now you're seeing over 20 bidders on some of these packages. So to Peter's point, a lot of interest in the space.

Our view is that the second half will see more transactions than the first half. Additionally, when speaking with competing buyers, they believe that the decrease in volatility and the 10-year yield have contributed to the lowering of short-term interest rates, which helps their carry. They are now a bit more certain regarding fixed-rate financing, which can lead to greater comfort in pricing. Overall, cap rates have narrowed by about 25 basis points over the last three months, and there has been an increase in expectations for unlevered IRRs. Therefore, the market has become a bit more competitive.

Okay. That's helpful. And how aggressively are you guys looking to add to your land pipeline today? And have you seen land pricing come down in any material manner across your core markets?

Jojo?

We currently have a strong pipeline to grow our platform and company. We'll continue to monitor the submarkets, ensuring that the supply and demand dynamics are favorable. We're actively searching for land sites. It's worth noting that land pricing hasn't seen a significant decline compared to rents, resulting in a notable gap between buyer and seller expectations. On the positive side, there are more buyers now being slightly more aggressive in acquiring land sites, even with lower yield expectations.

Yeah. Landowners, it seems I think the market is going to go back to 2022 pricing, which we definitely don't. So that's why the bid-ask that Jojo references is pretty wide. So we are out there looking for land, but the transactions volume on that front are kind of slow.

Okay. That’s helpful. Thanks, guys. Appreciate the time.

And the next question comes from Nick Thillman with Baird. Please go ahead.

Good morning, everyone. Peter, you recently mentioned that weather has become more of a factor in tenant decision-making. Is this related to the hurricane, possibly in South Florida? How recent is this situation, and how widely does it apply?

It's more of a broad comment about the frequency of these highly disruptive weather patterns, they cause great economic damage. It probably has a big impact on consumption. So you can't ignore it. Now they are geographically confined, I guess, you would say, but they're still big and they're now coming back to back. It's just something else that's on the minds of people who are looking at all the uncertainties that they have to weighed through before they make investment dollars in new growth.

That's helpful. And then on First Logistics Center, it seemed like the second building that's still in lease-up. It seemed as though you guys are pretty bullish on the prospects there. With the tenant listing that other space as sublease space, is that another competitive building, you think or is there different space needs in that specific submarket?

Nick, it's Peter Schultz. The tenant will be subletting the entire building. Regardless of the current shorter-term sublease, they will be marketing the whole building. The remaining space in the second building is 350,000 square feet. They are not competitive. We've seen some activity, but I'm a bit disappointed with the slow decision-making from some prospects. However, there are really two distinct spaces.

That’s it for me. Thanks.

And the next question comes from Vince Tibone with Green Street. Please go ahead.

Hi, good morning. Could you share your views on the latest California Legislation, impacting industrial development, AB-98? Particularly, does this bill impact your existing land bank at all in California and your ability to build on that land? And then also what impact do you think this legislation could have on industry-wide supply in California over the next few years?

Generally speaking, I will now turn it over to Jojo for more details on our portfolio. This will serve as a tailwind for our business, enhancing the value of our existing assets. Over time, it is likely to put upward pressure on rents. Jojo can elaborate on our holdings and our position in this matter. Overall, we are in pretty good shape.

Sure, Vince, thanks for your question. For those who aren't aware, AB-98 is the new California state law that aims to limit industrial development based on the proximity to sensitive receptors, such as schools, residences, and hospitals. This law requires building upgrades as well as increased setbacks and buffer zones. All of our land currently under entitlement is exempt from AB-98 because this law affects development projects that have not commenced their permitting or entitlement process after October 1, 2024. I want to clarify that anything starting to build after September 30 of this year will be subject to AB-98. To add to Peter's comments, we believe there will be numerous sites that will be very challenging or nearly impossible to develop due to the restrictions imposed by AB-98. This will ultimately constrain land development across the state, and we believe that any limitation on the supply of developable land will enhance the value of our existing sites and buildings. Additionally, a decrease in potential supply should be beneficial for market fundamentals, such as rent growth. I hope that answers your question, Vince.

No, that's really helpful information, and we're trying to consider how much this new legislation can influence the pace of development in the Inland Empire compared to historical trends. This is all very helpful. Thank you.

Our next question comes from Michael Mueller with JPMorgan. Please go ahead.

Yeah. Hi. I think you mentioned the go-forward asset sales could be considerably lower on a go-forward basis. And it seems like in the past, you've normally pointed to 75 to 125 or 150 of annual disposition targets. So I guess, how should we read into what that implies for development starts going forward even relative to this year? Is it implying much lower go-forward pace and just how sensitive is dispositions to start?

Yeah. They're disconnected or they're not connected, let me say it that way. The sales program over the last dozen years, as you've seen and as you know, for us was to reallocate capital away from lower growth assets into higher growth opportunities. We're now to a point where that program is essentially over. And so that really has nothing to do with developments. Now yes, obviously, the sales proceeds over the last decade or so have helped fund new developments. But we'll just fund those developments in a different way going forward, we'll fund them through some sales but much lower numbers, as well as retained cash flow and the right proportion of debt and equity. So it's not really going to impact starts. They're not connected.

Got it. Okay. Thank you.

And the next question comes from Nicholas Yulico with Scotiabank. Please go ahead.

Thanks. I wanted to revisit the tenant and the accelerated tenant improvement reimbursement. Was that income included in the guidance, or was it unexpected this quarter?

That was unexpected because it was the accelerated recognition of that tenant improvement reimbursement liability. So what the accounting rules tell you to do is you have to amortize that over the life of the lease. Well, at the end of the third quarter, we accelerated the unamortized balance, which I think was about $4.4 million or $4.5 million. So that was a benefit, but that was netted against the write-off of the straight-line rent receivable of $5.5 million. So that's how you get the $0.01 per share. So again, it's all in conjunction with the tenant and it was not anticipated when we issued guidance in the second quarter.

Okay. And then the write-off, which is the offset that also wasn't in prior guidance?

It was not in prior guidance, correct. Both pieces were not.

Okay. Great. Thanks. Appreciate it.

And the next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Hi. Sorry, I just had one quick follow-up that I figured it was easier to ask this way. Before when you guys were talking about the rent growth, I think you mentioned market rent growth that it was about flattish, maybe up a little, and then excluding Southern California, it might have been up 2% to 3%. Just for the time period, was that year-over-year in the third quarter or something else?

That's year-over-year.

In 3Q, okay. Thanks.

And the next question comes from Brendan Lynch with Barclays. Please go ahead.

Great. Thanks for taking my question. Just a follow-up on AB-98. My sense is that there's a lot of gray area in the bill and maybe there's some additional legislation that might be coming. Can you talk about whether you think the dynamics of what has been established with AB-98 is actually finalized versus might be adjusted in the future?

Sure, that's a great question. When reviewing AB-98, it's clear that more clarification could be helpful. Currently, the investment and setback criteria, as well as specific building upgrades, vary based on the size and proximity of each building to the receptor. There is enough information to make an educated guess about potential developments and available land sites. However, additional details would certainly enhance understanding, especially regarding building upgrades and layout specifics. It's difficult to predict what changes might arise from this. For now, it remains state law and does include some pertinent details.

It's also fair to say the municipalities don't like this. So it will be litigated as well. So we'll see. There's definitely going to be some movement here.

Great. That's helpful. And maybe just one other one on this topic. Did you submit kind of a flurry of entitlement request rate before the deadline to avoid some of the consequences of the bill itself?

Not at all. All our sites were clearly well into development for several years, and we have some entitled sites already. So none were done as a quick reaction to this AB-98.

Great. Thanks for the color.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Baccile for any closing remarks.

Thank you, operator, and thanks to everyone for participating on our call today. If you have any follow-ups from our call, please reach out to Art, Scott or me. Have a great week.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.